Employee Referral Bonuses: Definition, Types and Guidelines
Updated March 15, 2023
Using current employees and referrals can help employers find qualified candidates and create a productive workforce. When organizations use a referral bonus incentive, they can motivate team members to recommend their qualified colleagues and friends. If you're in the HR field or your company offers a referral bonus, learning more about the incentive can help you better understand how it benefits both employers and teams.
In this article, we discuss referral bonuses and the different types, plus we go over the advantages of these incentives.
What is a referral bonus?
A referral bonus is an incentive for employees to recruit qualified candidates for their company. Typically a financial reward, companies pay employees a certain amount if they recommend a candidate for an open position. Human resources departments often coordinate these programs, along with the guidelines, payment schedule and tax requirements.
Common referral bonus guidelines
There are often several guidelines for a company's referral bonus program:
Interview or offer: You may only receive the bonus if the referred employee gets an interview or gets hired.
Employment length: The bonus may only apply if the hire stays with the company for an amount of time, usually between 90 days and six months.
Full-time: Companies might limit the bonuses to employees who refer people for full-time positions.
Exempt staff: Executives, recruiters or HR employees are typically exempt from referral bonuses.
New hires: These bonuses often only apply to employees that are new to the company.
Related: What Is a Full-time Job?
Types of referral bonuses
Employers can offer their employees many types of referral bonuses for bringing qualified candidates to the company. Here are 11 different types of referral bonuses:
Additional benefits bonus
Instead of a monetary bonus, the company donates this money to the charity of the employee's choice. Employees appreciate having the money go to a good cause in their name.
One useful incentive is for employers and employees to come to an agreement on what bonus the employee receives. This is a way to make employees even more motivated because they can get exactly what they want.
Today, many organizations are focused on diversity, equity and inclusion. As a result, companies may offer referral bonuses for employees who are from under-represented backgrounds as defined by the organization.
Some companies offer tuition reimbursement for staff pursuing a degree. They may offer more tuition as an incentive for staff to make referrals.
The most common type of referral bonus is a financial bonus. When employees refer candidates, they receive a certain amount of money from the company dependent on the level of the role they plan to fill and the position's demand.
Rather than giving out money, a company may choose to give out a valuable prize for referrals. They choose something that most people would want. For example, a new laptop or cellphone would be motivational for most employees.
Raffle bonus programs collect the names of each employee that refers a candidate over the course of a specified amount of time. For each additional reference, the employee's name is entered again. Then, the company has a monthly or quarterly raffle to pick one person's name to get a bonus.
A social bonus is when an employee receives social recognition and praise for their help in finding candidates. For example, the head of the company may give this employee public praise during a company-wide meeting.
Tiered bonuses are often given in increments over a period of time and after specific milestones are met. For instance, they may receive an initial bonus when their reference is interviewed and hired and then receive more money if the candidate stays with the company for a certain amount of time.
A vacation bonus could be an all-expense-paid trip or a monetary bonus intended to go toward travel costs. This could also include more vacation time for successful referrals.
Advantages of referral bonuses
Companies use referral bonuses to help grow their pool of talent. Both companies and employees can benefit from this incentive. Here are some advantages of referral bonuses:
Save money on staffing: Giving an employee a bonus tends to be more cost-effective than hiring a staffing agency or a consultant.
Find better candidates: If an employee is willing to recommend someone, this candidate is likely to be qualified for the position. An employee knows their reputation can be affected by their referral, so they are typically conscientious about who they refer.
Retain employees: Offering referral bonuses incentivizes employees to refer people and can provide a reason for them to stay with your company.
Reduce time-to-fill for roles: Using a referral bonus can help a company eliminate recruitment time and fill open roles faster.
Add to team diversity: Companies can use referral bonuses to find and hire qualified candidates from under-represented groups.
Boost staff credibility: When you refer qualified candidates that strengthen the team, it can help you improve your credibility and reputation in the workplace.
When to refer someone for a job
Before referring someone to a job, it's important to make sure they are a good fit. This way you can maintain a good reputation and continue being trusted by your employer. Here is when to refer someone for a job at your work:
The candidate is qualified. Find out if the person you have in mind has the skills, qualifications and professional experiences to be a good candidate for this role. Ask them if you can look at their resume and other useful materials to learn more about them.
They fit with the work culture. Every work culture is different, so ensure that the person you want to refer would be a good fit for the company. For instance, if one of your friends is innovative, they may be effective in a role for a technology start-up.
You want to work with them. Ask yourself if you really want to see and work with this person almost every day. If you worked well with someone in the past, it's likely that you'd enjoy working with them again.
They're excited about the organization and the role. If you find that the person isn't enthusiastic about the position, you may want to look for someone else. Recommend someone who is excited about the company and can perform well.
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